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Beyond micro-credit
Putting development back
into micro-finance
Vistaar Publications
New Delhi
o
Oxfam
Oxford, UK
Published in association with
g&new
economics
F O U N D A T I O N
Vistaar Publications
(A division of Sage Publications India Pvt Ltd)
32 M-block Market, Greater Kailash-I
New Delhi 110 048
List of tables 9
List of figures 10
List of boxes 11
List of abbreviations 12
Acknowledgements 16
1. Introduction 19
2. Introduction to the financial sector in India 33
Introduction
Beyond micro-credit:
An outline of the book
Some issues
The link between micro-credit and poverty reduction has not
been proven. Among the range of possible micro-financial
services, micro-credit has predominated, on the assumption
that it will deliver higher incomes and increased assets to
the poor through micro-enterprise. Far less attention has
been paid to the need to reduce risk, perhaps the most press-
ing need especially for the poorest households. Indeed, in-
jecting capital into existing micro-enterprises, or creating new
ones, may enhance the risk that their poor owners face. There
is indeed evidence that, as a result, a proportion of micro-
credit clients have become worse off after accessing micro-
loans (Hulme and Mosley, 1996). The need to reduce risk is
Introduction 27
why many poor people would prefer regular wage labour than
managing their own micro-enterprise, if only such opportu-
nities were available (Mahajan, 1997).
Micro-credit providers cannot of course take their poor
borrowers for a ride. While most providers emphasise invest-
ments of working or fixed capital in micro-enterprises, the
reality is that many clients use the credit for consumption-
smoothing, especially as most funds are fungible within a
household. Such consumption-smoothing can allow house-
holds to cope more effectively, but it also runs the risk of
pushing them further into debt if they cannot repay the loan
out of enhanced income streams. More appropriate financial
products for this purpose are savings, insurance and loans
to allow poor people to repay their high-interest loans to
moneylenders and to meet emergency expenditure. And yet
these have received far less attention than micro-credit for
micro-enterprise. At the same time, while such products to
enable consumption-smoothing can stabilise a poor house-
hold's condition, they cannot propel them out of poverty.
With such a strong focus on micro-credit for micro-
enterprise, it is perhaps surprising that less attention has
also been paid to linking poor people to growing market op-
portunities and to enhancing the control they can exercise
over their economic environment.
Enterprise promotion was a focus of development activity
until the early 1990s. Many involved in those endeavours
feel that the growth of minimalist micro-credit has diverted
attention from the on-going challenges of creating or strength-
ening enterprise. An important conclusion of initiatives to
promote enterprises had in fact been that finance is often
not the ruling constraint, and yet thinking and practice on
the wider needs of enterprises has progressed little since the
early 1990s. It is gradually resurfacing under the name of
'business development services'.
Another important conclusion was that assisting indi-
vidual enterprises was often not effective, whether through
minimalist micro-credit or wider business services. A more
systematic approach, often encompassing a sub-sectoral fo-
cus, was needed to impact a wider range of enterprises or
local or regional economies as a whole (Dichter and Mahajan,
1990; USAID, 1987).
28 Beyond micro-credit
Notes
1. For examples, see especially www.cgap.org, as well as the Microbcuiking
Bulletin, Ledgerwood (1999) and those cited in Rutherford (2000:
121).
2. Sec, for example, McClelland and Winter (1969), Lynton and Pareek
(1992) and Lynton (1998: 159-60).
Chapter 2
Introduction to the
financial sector in India
Diversification needs
Consumption-smoothening
needs
Notes
1. The share of debt from informal sources stood at 58 per cent for the
lowest asset group with less than Rs 5,000 In assets, compared to
only 19 per cent for the highest asset group with assets of Rs 250,000
and above (Mahajan, 2000: 170).
2. The estimates In this section come from Mahajan (nd) and Mahajan
and Nagasri (1999).
3. One survey showed that over 55 per cent of slum-dwellers surveyed
In Delhi had lost money to one or other deposit-taker of this kind
(Titus, 1995).